UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended
June 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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Commission File
No. 0-16431
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TCF FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 41-1591444
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
801 Marquette Avenue, Suite 302, Minneapolis, Minnesota 55402
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(Address and Zip Code of principal executive offices)
Registrant's telephone number, including area code: (612) 661-6500
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class July 31, 1995
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Common Stock, $.01 par value 17,737,833 shares
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
Pages
Part I. Financial Information ------
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at June 30, 1995 and December 31, 1994.................. 3
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1995 and 1994....... 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1995 and 1994................. 5
Consolidated Statements of Stockholders' Equity for
the Year Ended December 31, 1994 and for the
Six Months Ended June 30, 1995.......................... 6
Notes to Consolidated Financial Statements................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three
and Six Months Ended June 30, 1995 and 1994........ 10-29
Supplementary Information................................. 30-31
Part II. Other Information
Items 1-6..................................................... 32
Signatures............................................................. 34
Index to Exhibits...................................................... 35
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands, except per-share data)
(Unaudited)
At At
June 30, December 31,
1995 1994
---------- ------------
ASSETS
Cash and due from banks $ 231,102 $ 224,266
Interest-bearing deposits with banks 2,280 193,751
Federal funds sold -- 6,900
U.S. Government and other marketable securities
held to maturity (fair value of $3,594 and $3,526) 3,595 3,528
Federal Home Loan Bank stock, at cost 58,999 78,925
Securities available for sale (amortized cost of $40,830
and $140,074) 38,575 138,430
Loans held for sale 260,605 201,511
Mortgage-backed securities held to maturity (fair value
of $1,260,537 and $1,512,606) 1,251,705 1,601,200
Loans:
Residential real estate 2,729,933 2,662,707
Commercial real estate 997,401 997,632
Commercial business 193,174 190,975
Consumer 1,465,436 1,299,458
Unearned discounts and deferred fees (56,064) (32,391)
---------- -----------
Total loans 5,329,880 5,118,381
Allowance for loan losses (62,596) (56,343)
---------- -----------
Net loans 5,267,284 5,062,038
Premises and equipment 124,824 136,158
Real estate:
Total real estate 27,928 23,922
Allowance for real estate losses (1,569) (2,576)
---------- -----------
Net real estate 26,359 21,346
Accrued interest receivable 50,434 46,465
Due from brokers -- 27,379
Goodwill 12,330 13,355
Deposit base intangibles 13,640 14,662
Mortgage servicing rights 11,711 12,247
Other assets 79,249 63,427
---------- -----------
$7,432,692 $7,845,588
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Checking $1,069,237 $1,031,039
Passbook and statement 902,988 940,459
Money market 624,468 646,732
Certificates 2,653,126 2,781,488
---------- -----------
Total deposits 5,249,819 5,399,718
---------- -----------
Securities sold under repurchase agreements 672,409 429,469
Federal Home Loan Bank advances 805,781 1,354,663
Subordinated debt 48,876 50,676
Collateralized obligations 41,701 42,035
Other borrowings 21,094 8,152
---------- -----------
Total borrowings 1,589,861 1,884,995
Accrued interest payable 13,822 20,043
Accrued expenses and other liabilities 83,640 65,363
---------- -----------
Total liabilities 6,937,142 7,370,119
---------- -----------
Stockholders' equity:
Preferred stock, par value $.01 per share, 30,000,000
shares authorized; 2,710,000 issued and outstanding 27 27
Common stock, par value $.01 per share, 70,000,000 shares
authorized; 17,734,434 and 17,086,173 shares issued 177 171
Additional paid-in capital 263,924 251,345
Unamortized deferred compensation (11,984) (6,986)
Retained earnings, subject to certain restrictions 245,037 244,779
Loan to Executive Deferred Compensation Plan (163) (195)
Employee Stock Ownership Plan debt -- (1,500)
Unrealized loss on securities available for sale, net (1,468) (1,160)
Treasury stock, at cost, 322,880 shares in 1994 -- (11,012)
---------- -----------
Total stockholders' equity 495,550 475,469
---------- -----------
$7,432,692 $7,845,588
---------- -----------
---------- -----------
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
3
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per-share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- --------
Interest income:
Interest on loans $121,791 $ 96,850 $237,258 $190,527
Interest on loans held for sale 4,607 4,023 8,573 9,230
Interest on mortgage-backed securities
held to maturity 22,581 28,396 48,427 51,126
Interest on investments 1,372 2,957 3,272 5,831
Interest on securities available for sale 1,290 2,913 2,902 8,868
-------- -------- -------- --------
Total interest income 151,641 135,139 300,432 265,582
-------- -------- -------- --------
Interest expense:
Interest on deposits 49,081 45,313 97,386 92,254
Interest on borrowings 23,268 21,316 48,106 40,690
-------- -------- -------- --------
Total interest expense 72,349 66,629 145,492 132,944
-------- -------- -------- --------
Net interest income 79,292 68,510 154,940 132,638
Provision for credit losses 2,924 1,344 9,612 3,984
-------- -------- -------- --------
Net interest income after provision for
credit losses 76,368 67,166 145,328 128,654
-------- -------- -------- --------
Non-interest income:
Fee and service charge revenues 22,542 21,124 43,295 41,009
Data processing revenue 2,640 2,239 5,064 4,368
Commissions on sales of annuities 2,562 3,081 4,928 5,553
Title insurance revenues 2,867 2,544 5,140 5,268
Gain (loss) on sale of loans held for sale, net (204) (65) 372 959
Loss on sale of mortgage-backed securities, net -- -- (21,037) --
Gain (loss) on sale of securities available for
sale, net 60 (36) (190) 2,722
Gain on sale of loan servicing, net 1,006 693 1,529 1,254
Gain on sale of branches, net 1,061 -- 1,103 --
Other 1,574 1,582 2,782 3,004
-------- -------- -------- --------
Total non-interest income 34,108 31,162 42,986 64,137
-------- -------- -------- --------
Non-interest expense:
Compensation and employee benefits 34,233 31,642 69,886 62,618
Occupancy and equipment, net 12,517 11,802 25,012 23,839
Advertising and promotions 4,275 3,604 8,727 7,218
Federal deposit insurance premiums and
assessments 3,451 3,882 6,923 7,765
Amortization of goodwill and other intangibles 791 822 1,581 1,645
Provision for real estate losses 378 1,828 541 2,627
Cancellation cost on early termination of
interest-rate exchange agreements -- -- 4,423 --
Merger-related expenses -- -- 21,733 --
Other 15,989 15,294 29,968 30,830
-------- -------- -------- --------
Total non-interest expense 71,634 68,874 168,794 136,542
-------- -------- -------- --------
Income before income tax expense
and extraordinary item 38,842 29,454 19,520 56,249
Income tax expense 15,448 11,692 7,765 22,255
-------- -------- -------- --------
Income before extraordinary item 23,394 17,762 11,755 33,994
Extraordinary item:
Penalties on early repayment of FHLB advances,
net of tax benefit of $578 -- -- (963) --
-------- -------- -------- --------
Net income 23,394 17,762 10,792 33,994
Dividends on preferred stock -- 677 678 1,355
-------- -------- -------- --------
Net income available to common shareholders $ 23,394 $ 17,085 $ 10,114 $ 32,639
-------- -------- -------- --------
-------- -------- -------- --------
Per common share:
Income before extraordinary item $ 1.31 $ .99 $ .62 $ 1.89
Extraordinary item -- -- (.05) --
-------- -------- --------- --------
Net income $ 1.31 $ .99 $ .57 $ 1.89
-------- -------- --------- --------
-------- -------- --------- --------
Dividends declared $ .3125 $ .25 $ .5625 $ .50
-------- -------- --------- --------
-------- -------- --------- --------
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
4
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
-------------------------
1995 1994
----------- -----------
Cash flows from operating activities:
Net income $ 10,792 $ 33,994
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 7,164 7,170
Amortization of goodwill and other intangibles 1,581 1,645
Amortization of fees, discounts and premiums (1,320) (3,291)
Proceeds from sales of loans held for sale 178,998 764,272
Principal collected on loans held for sale 5,455 5,910
Originations and purchases of loans held for sale (243,748) (565,504)
Net (increase) decrease in other assets and liabilities,
and accrued interest (16,437) 13,971
Provisions for credit and real estate losses 10,153 6,611
(Gain) loss on sale of securities available for sale, net 190 (2,722)
Gain on sale of loan servicing, net (1,529) (1,254)
Gain on sale of branches, net (1,103) --
Penalties on early repayment of FHLB advances 1,541 --
Loss on sale of mortgage-backed securities, net 21,037 --
Cancellation cost on early termination of interest-rate
exchange agreements 4,423 --
Write-off of equipment 13,435 --
Other, net 2,324 2,222
----------- -----------
Total adjustments (17,836) 229,030
----------- -----------
Net cash provided (used) by operating activities (7,044) 263,024
----------- -----------
Cash flows from investing activities:
Proceeds from sales of mortgage-backed securities 211,117 --
Principal collected on mortgage-backed securities 78,147 262,993
Purchases of mortgage-backed securities -- (518,257)
Principal collected on loans 562,040 677,284
Loan originations (789,126) (839,932)
Net (increase) decrease in interest-bearing deposits
with banks 191,471 (20,761)
Net increase in securities purchased under resale agreements -- (14,400)
Proceeds from sales of securities available for sale 90,218 203,435
Proceeds from maturities of securities available for sale 74,794 562,295
Purchases of securities available for sale -- (490,503)
Proceeds from maturities of U.S. Government and other
marketable securities -- 500
Proceeds from redemption of FHLB stock 24,049 --
Purchases of term federal funds sold -- (69,000)
Proceeds from maturities of term federal funds sold -- 49,000
Net (increase) decrease in short-term federal funds sold 6,900 (161,500)
Sales of deposits, net of cash paid (45,743) --
Proceeds from sales of real estate 8,531 12,111
Payments for acquisition and improvement of real estate (1,483) (510)
Proceeds from sale of loan servicing 1,724 1,425
Purchases of premises and equipment (10,160) (8,024)
Other, net (746) 8,932
----------- -----------
Net cash provided (used) by investing activities 401,733 (344,912)
----------- -----------
Cash flows from financing activities:
Net decrease in deposits (102,130) (253,401)
Proceeds from securities sold under repurchase agreements
and federal funds purchased 5,030,457 1,458,108
Payments on securities sold under repurchase agreements
and federal funds purchased (4,774,017) (1,308,658)
Proceeds from FHLB advances 1,073,795 896,953
Payments on FHLB advances (1,624,218) (714,527)
Payments for termination of interest-rate exchange
agreements (4,581) --
Payments on collateralized obligations and other borrowings (1,002) (1,942)
Proceeds on exercise of stock warrants and stock options 14,473 1,139
Repurchases of common stock -- (12,615)
Other, net (630) (6,802)
----------- -----------
Net cash provided (used) by financing activities (387,853) 58,255
----------- -----------
Net increase (decrease) in cash and due from banks 6,836 (23,633)
Cash and due from banks at beginning of period 224,266 198,324
----------- -----------
Cash and due from banks at end of period $ 231,102 $ 174,691
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest on deposits and borrowings $ 149,905 $ 133,544
----------- -----------
----------- -----------
Income taxes $ 2,781 $ 26,097
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
5
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
(Unaudited)
Loan to Unrealized
Executive Gain
Number Unamor- Deferred (Loss) on
of tized Compen- Securities
Common Pre- Additional Deferred sation Available
Shares ferred Common Paid-in Compen- Retained Plan and for Sale, Treasury
Issued Stock Stock Capital sation Earnings ESOP debt Net Stock Total
---------- ------ ------ ---------- -------- --------- ---------- ---------- -------- --------
Balance, December 31, 1993,
as originally reported 12,361,569 $-- $124 $150,602 $ (1,272) $146,502 $ (348) $ -- $ -- $295,608
Adjustments for
pooling-of-interests 4,286,983 27 43 87,958 -- 48,329 (3,900) -- -- 132,457
---------- ------ ------ ---------- -------- --------- ---------- ---------- -------- --------
Balance, December 31, 1993,
as restated 16,648,552 27 167 238,560 (1,272) 194,831 (4,248) -- -- 428,065
Cumulative effect of
change in accounting
for securities available
for sale at January 1,
1994, net of tax -- -- -- -- -- -- -- 3,276 -- 3,276
Net income -- -- -- -- -- 70,183 -- -- -- 70,183
Dividends on preferred stock -- -- -- -- -- (2,710) -- -- -- (2,710)
Dividends on common stock 174,411 -- 2 5,266 -- (17,525) -- -- -- (12,257)
Purchase of 535,000 shares
to be held in treasury -- -- -- -- -- -- -- -- (17,524) (17,524)
Issuance of 189,200 shares
of restricted stock, of
which 183,200 shares were
from treasury 6,000 -- -- 2,007 (7,541) -- -- -- 5,550 16
Grant of 28,500 shares of
restricted stock to
outside directors from
treasury -- -- -- 117 (1,065) -- -- -- 948 --
Issuance of 420 shares to
employee benefit plans
from treasury -- -- -- 4 -- -- -- -- 14 18
Issuance of shares to
Dividend Reinvestment
Plan 4,030 -- -- 122 -- -- -- -- -- 122
Issuance of shares under
Officers' Stock
Performance
Investment Plan 23,045 -- -- 705 -- -- -- -- -- 705
Cancellation of shares of
restricted stock (1,500) -- -- (56) 40 -- -- -- -- (16)
Amortization of deferred
compensation -- -- -- -- 2,852 -- -- -- -- 2,852
Exercise of stock
options 109,111 -- 1 2,132 -- -- -- -- -- 2,133
Exercise of stock
warrants 122,524 -- 1 2,488 -- -- -- -- -- 2,489
Payments on Loan to
Executive Deferred
Compensation Plan -- -- -- -- -- -- 153 -- -- 153
Payments on Employee
Stock Ownership
Plan debt -- -- -- -- -- -- 2,400 -- -- 2,400
Change in unrealized gain
(loss) on securities
available for sale, net -- -- -- -- -- -- -- (4,436) -- (4,436)
---------- ------ ------ ---------- -------- --------- ---------- ---------- -------- --------
Balance, December 31, 1994 17,086,173 27 171 251,345 (6,986) 244,779 (1,695) (1,160) (11,012) 475,469
Net income -- -- -- -- -- 10,792 -- -- -- 10,792
Dividends on preferred
stock -- -- -- -- -- (678) -- -- -- (678)
Dividends on common stock -- -- -- -- -- (9,856) -- -- -- (9,856)
Issuance of shares to
Dividend Reinvestment
Plan 300 -- -- 11 -- -- -- -- -- 11
Issuance of 186,880 shares
from treasury to effect
merger with Great Lakes (186,880) -- (2) (6,372) -- -- -- -- 6,374 --
Issuance of 136,000 shares
of restricted stock from
treasury -- -- -- 1,699 (6,337) -- -- -- 4,638 --
Grant of restricted stock
to outside directors -- -- -- -- (835) -- -- -- -- (835)
Repurchase and cancellation
of shares (1,338) -- -- (52) -- -- -- -- -- (52)
Amortization of deferred
compensation -- -- -- -- 2,174 -- -- -- -- 2,174
Exercise of stock options 151,330 -- 2 2,781 -- -- -- -- -- 2,783
Exercise of stock warrants 632,048 -- 6 12,712 -- -- -- -- -- 12,718
Issuance of common stock on
conversion of convertible
debentures 52,801 -- -- 1,800 -- -- -- -- -- 1,800
Payments on Loan to
Executive Deferred
Compensation Plan -- -- -- -- -- -- 32 -- -- 32
Payments on Employee
Stock Ownership Plan
debt -- -- -- -- -- -- 1,500 -- -- 1,500
Change in unrealized
loss on securities
available for sale,
net -- -- -- -- -- -- -- (308) -- (308)
---------- ------ ------ ---------- -------- --------- ---------- ---------- -------- --------
Balance June 30, 1995 17,734,434 $27 $177 $263,924 $(11,984) $245,037 $ (163) $(1,468) $ -- $495,550
---------- ------ ------ ---------- -------- --------- ---------- ---------- -------- --------
---------- ------ ------ ---------- -------- --------- ---------- ---------- -------- --------
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
6
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation. The
results of operations for interim periods are not necessarily indicative
of the results to be expected for the entire year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and
therefore do not include all information and notes necessary for
complete financial statements in conformity with generally accepted
accounting principles. The material under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
is written with the presumption that the users of the interim financial
statements have read or have access to the most recent Annual Report on
Form 10-K of TCF Financial Corporation ("TCF"), which contains the
latest audited financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and Results
of Operations as of December 31, 1994 and for the year then ended.
Certain reclassifications have been made to prior period balances to
conform to current period presentation. For consolidated statements of
cash flows purposes, cash and cash equivalents include cash and due from
banks.
(2) CHANGE IN METHOD OF ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting
for Mortgage Servicing Rights." SFAS No. 122 amends the accounting for
mortgage servicing rights prescribed under SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities," to eliminate the accounting
distinction between rights to service mortgage loans for others that are
acquired through loan origination activities and those acquired through
purchase transactions. Under the provisions of SFAS No. 122, entities
are required to recognize as separate assets rights to service mortgage
loans for others, however those servicing rights are acquired. An entity
that either purchases or originates mortgage loans and subsequently sells
or securitizes the mortgage loans and retains the mortgage servicing
rights is required to allocate the total cost of the mortgage loans to
the mortgage servicing rights and the mortgage loans (without the
mortgage servicing rights) based on their relative fair values. If it is
not practicable to estimate the fair values of the mortgage servicing
rights and the mortgage loans, the entire cost of acquiring the loans
should be allocated to the mortgage loans and no cost should be allocated
to the mortgage servicing rights. SFAS No. 122 also requires that
capitalized mortgage servicing rights be assessed for impairment based on
the fair value of those rights. TCF adopted SFAS No. 122 on a
prospective basis effective April 1, 1995. As a result, approximately
$1 million of net originated mortgage servicing rights were capitalized
in the 1995 second quarter. In accordance with SFAS No. 122, prior
period financial statements have not been restated to reflect the change
in accounting method.
7
(3) CHANGE IN METHOD OF ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Effective January 1, 1995, TCF adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." SFAS No. 114 requires that impaired loans, including all
loans that are restructured in a troubled debt restructuring involving
a modification of terms, be measured at the present value of expected
future cash flows discounted at the loan's initial effective interest
rate. The fair value of the collateral of an impaired collateral-
dependent loan or an observable market price, if one exists, may be used
as an alternative to discounting. If the measure of the impaired loan is
less than the recorded investment in the loan, impairment is to be
recognized through the allowance for loan losses. A loan is considered
impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. SFAS No. 118 amends SFAS
No. 114 to allow a creditor to use existing methods for recognizing
interest income on impaired loans and to clarify disclosure requirements.
The adoption of SFAS No. 114 and SFAS No. 118 did not impact TCF's
results of operations for the first six months of 1995 or any prior
period. In accordance with SFAS No. 114 and SFAS No. 118, prior period
financial statements have not been restated to reflect the change in
accounting method.
(4) EARNINGS PER COMMON SHARE
The weighted average number of common and common equivalent shares
outstanding used to compute earnings per common share were 17,846,524
and 17,233,459 for the three months ended June 30, 1995 and 1994,
respectively, and 17,711,561 and 17,237,513 for the six months ended
June 30, 1995 and 1994, respectively.
(5) BUSINESS COMBINATION
On February 8, 1995, TCF completed its acquisition of Great Lakes
Bancorp, A Federal Savings Bank ("Great Lakes"), a Michigan-based
savings bank with $2.8 billion in assets, $1.6 billion in deposits, 39
offices in Michigan and five offices in western Ohio. In connection
with the acquisition, TCF issued approximately 4.9 million shares of
its common stock for all of the outstanding common shares of Great Lakes.
In addition, each outstanding share of Great Lakes preferred stock was
exchanged for one share of TCF preferred stock with substantially
identical terms. TCF also assumed the obligation to issue common stock
upon the exercise or conversion of the outstanding warrants to purchase
Great Lakes common stock, the outstanding employee and director options to
purchase Great Lakes common stock, and the outstanding 7 1/4% convertible
subordinated debentures due 2011 of Great Lakes. In connection with the
acquisition, a pretax merger-related charge of $54 million was incurred
during the 1995 first quarter. The merger-related charges are described
in Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 10 through 29.
As a result of the acquisition, Great Lakes merged into TCF's existing
Michigan-based wholly owned savings bank subsidiary, TCF Bank Michigan
fsb. The resulting savings bank is operated as a direct subsidiary of
TCF and retained the Great Lakes name, certain members of its board of
directors, and headquarters in Ann Arbor, Michigan. The resulting
savings bank operates 54 offices in Michigan and five offices in western
Ohio.
8
The consolidated financial statements of TCF give effect to the
acquisition, which has been accounted for as a pooling-of-interests
combination. Accordingly, TCF's consolidated financial statements for
periods prior to the combination have been restated to include the
accounts and the results of operations of Great Lakes for all periods
presented, except for dividends declared per share. There were no
material intercompany transactions prior to the acquisition.
The significant accounting and reporting policies of TCF and Great Lakes
differed in certain respects. As required in a pooling-of-interests
business combination, the restated consolidated financial statements for
periods prior to the combination reflect certain adjustments to conform
Great Lakes' accounting methods to those of TCF. These adjustments
retroactively restate, for all periods presented, Great Lakes' method of
adoption of SFAS No. 72, "Accounting for Certain Acquisitions of Banking
or Thrift Institutions," SFAS No. 109, "Accounting for Income Taxes," and
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," to conform to TCF's method of adoption of these same
statements. Great Lakes adopted SFAS No. 115 effective December 31, 1993
on a prospective basis whereas TCF adopted SFAS No. 115 effective
January 1, 1994 on a prospective basis. The adjustments to conform Great
Lakes' method of adoption of SFAS No. 115 to that of TCF decreased
stockholders' equity at December 31, 1993 by $1.9 million. No adjustments
were required to the restated consolidated financial statements presented
herein to conform Great Lakes' method of adoption of SFAS No. 72 and SFAS
No. 109 to that of TCF.
The results of operations previously reported by TCF and Great Lakes on a
separate basis and the combined amounts presented in the accompanying
consolidated financial statements are summarized as follows (in
thousands):
Three Months Six Months
Ended June 30, Ended June 30,
1994 1994
-------------- --------------
Interest income:
TCF $ 87,177 $171,866
Great Lakes 47,962 93,716
-------- --------
Combined $135,139 $265,582
-------- --------
-------- --------
Net interest income:
TCF $ 49,549 $ 95,278
Great Lakes 18,961 37,360
-------- --------
Combined $ 68,510 $132,638
-------- --------
-------- --------
Net income:
TCF $ 13,939 $ 26,151
Great Lakes 3,823 7,843
-------- --------
Combined $ 17,762 $ 33,994
-------- --------
-------- --------
Earnings per common share:
TCF $ 1.12 $ 2.10
-------- --------
-------- --------
Great Lakes $ .47 $ .98
-------- --------
-------- --------
Combined $ .99 $ 1.89
-------- --------
-------- --------
9
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
ITEM 2. -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
TCF Financial Corporation ("TCF" or the "Company") reported record net income
of $23.4 million for the second quarter of 1995, compared with $17.8
million for the same period in 1994. Net income available to common
shareholders for the second quarter of 1995 was $23.4 million, or $1.31 per
common share, compared with $17.1 million, or 99 cents per common share, for
the second quarter of 1994.
For the first six months of 1995, TCF reported net income of $10.8 million,
compared with $34 million for the same 1994 period. Net income available to
common shareholders for the first six months of 1995 was $10.1 million, or 57
cents per common share, compared with $32.6 million, or $1.89 per common
share, for the same 1994 period.
TCF's 1995 first quarter results included certain merger-related charges
incurred in connection with TCF's acquisition of Great Lakes Bancorp, A
Federal Savings Bank ("Great Lakes"), which is described in Note 5 of Notes
to Consolidated Financial Statements. The following table summarizes the
major components of the merger-related charges, which were previously
disclosed in TCF's prospectus relating to the acquisition (in thousands):
Loss on sale of securities available for sale $ 310
Loss on sale of mortgage-backed securities 21,037
Loss on prepayment of FHLB advances 1,541(1)
Interest-rate exchange agreement termination costs 4,423
Provision for credit losses 5,000
Merger-related expenses:
Equipment charges 13,933
Severance and employee benefits 4,721
Professional fees 2,215
Other 864
------
Total merger--related expenses 21,733
------
Total pretax merger--related charges $54,044
-------
-------
<FN>
-------------------
(1) Reflected in the Consolidated Statements of Operations as an extraordinary
item, net of tax benefit of $578.
On an after-tax basis, these merger-related charges totaled $32.8 million,
or $1.86 per common share for the first six months of 1995.
During the first quarter of 1995, Great Lakes sold $232.2 million of
collateralized mortgage obligations from its held to maturity portfolio at a
pretax loss of $21 million. In addition, Great Lakes sold $17.3 million of
securities available for sale at a pretax loss of $310,000. The combined
weighted average yield on the assets sold was 6.30%. The collateralized
mortgage obligations and securities available for sale were sold in order to
reduce Great Lakes' interest-rate and credit-loss risk to levels consistent
with TCF's existing interest-rate risk position and credit-loss risk
policy. In addition to these asset sales, Great Lakes prepaid Federal Home
Loan Bank ("FHLB") advances, paid down wholesale borrowings and terminated
interest-rate exchange contracts during the first quarter of 1995. Great
Lakes prepaid $112.3 million of FHLB advances at a pretax loss of $1.5
million during the first quarter of 1995. This amount, net of a $578,000
income tax benefit, was recorded as an
10
extraordinary item in the Consolidated Statements of Operations. The FHLB
advances had a weighted average cost of 9.03% and a weighted average life of
one year. Interest-rate exchange contracts with notional principal amounts
totaling $544.5 million were terminated by Great Lakes at a pretax loss of $4.4
million. These actions were taken in order to reduce Great Lakes' level of
higher-cost wholesale borrowings and to reduce interest-rate risk.
Great Lakes recorded $5 million in provisions for credit losses in the first
quarter of 1995 to conform its credit loss reserve practices and methods to
those of TCF and to allow for the accelerated disposition of its remaining
problem assets.
In connection with its acquisition of Great Lakes, TCF committed to
restructure certain existing business activities of Great Lakes and to
integrate Great Lakes' data processing system into TCF's. These actions were
also designed to reduce staff by consolidating certain functions such as data
processing, investments and certain other back office operations. Subsequent
to its merger with TCF, Great Lakes recognized a pretax charge of $21.7
million in the first quarter of 1995 for these restructuring and
merger-related expenses.
Income for the first six months of 1995, excluding the $32.8 million in
after-tax merger-related charges, totaled $43.6 million, or $2.43 per
common share, a 28.4% increase from $34 million, or $1.89 per common share,
for the same period in 1994. On the same basis, return on average common
equity was 19.10% for the first six months of 1995 compared with 15.86% for
the same 1994 period.
NET INTEREST INCOME
Net interest income for the second quarter of 1995 was a record $79.3
million, up 15.7% from $68.5 million recorded in the second quarter of 1994.
The net interest margin for the second quarter of 1995 was 4.58%, up from
3.88% for the same period in 1994. Net interest income for the first six
months of 1995 totaled $154.9 million, up 16.8% from $132.6 million for the
same 1994 period. The net interest margin for the first six months of 1995
was 4.45%, up from 3.78% for the same period in 1994. TCF's net interest
income and net interest margin increased primarily due to increased yields
and growth of consumer loans, the favorable impact of the first-quarter
merger-related activities at Great Lakes, lower average levels of
non-performing assets, and increased capital.
If variable index rates (e.g., prime) were to decline dramatically, TCF may
experience compression of its net interest margin, as it is likely that interest
rates paid on retail deposits will not decline as quickly, or to the same
extent, as the decline in the yield on interest rate sensitive assets such as
home equity loans. In addition, competition for checking and savings
deposits, an important source of lower cost funds for TCF, has intensified
among depository and other financial institutions. As a result of this
competition, TCF has experienced a slight increase in the rates paid on its
deposits. TCF may experience compression in its net interest margin if the
rates paid on deposits continue to increase. See "Asset/Liability
Management -- Interest Rate Risk."
11
The following rate/volume analysis details the increases (decreases) in
interest income and expense resulting from interest rate and volume changes
during the second quarter and first six months of 1995 as compared to the
same periods last year. Changes attributable to the combined impact of volume
and rate have been allocated proportionately to the change due to volume and
the change due to rate.
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
Versus Same Period in 1994 Versus Same Period in 1994
----------------------------- ----------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------- ----------------------------
Volume Rate Total Volume Rate Total
------ ------- ------- ------- ------- -------
(In thousands)
Securities available for sale $(2,485) $ 862 $(1,623) $(8,347) $ 2,381 $(5,966)
------- ------- ------- ------- ------- -------
Loans held for sale (335) 919 584 (2,665) 2,008 (657)
------- ------- ------- ------- ------- -------
Mortgage--backed securities
held to maturity (6,849) 1,034 (5,815) (4,369) 1,670 (2,699)
------- ------- ------- ------ ------- -------
Loans:
Residential real estate 5,875 2,308 8,183 12,837 3,426 16,263
Commercial real estate (271) 966 695 (1,300) 2,325 1,025
Commercial business 409 850 1,259 203 1,586 1,789
Consumer 7,427 7,377 14,804 13,447 14,207 27,654
------- ------- ------- ------- ------- -------
Total loans 13,440 11,501 24,941 25,187 21,544 46,731
------- ------- ------- ------- ------- -------
Investments:
Interest--bearing deposits
with banks (383) 133 (250) (434) 231 (203)
Federal funds sold (1,474) 440 (1,034) (3,201) 1,040 (2,161)
U.S. Government and other
marketable securities
held to maturity (2) (21) (23) (9) (77) (86)
FHLB stock (468) 190 (278) (516) 407 (109)
------- ------- ------- ------- ------- -------
Total investments (2,327) 742 (1,585) (4,160) 1,601 (2,559)
------- ------- ------- ------- ------- -------
Total interest income 1,444 15,058 16,502 5,646 29,204 34,850
------- ------- ------- ------- ------- -------
Deposits:
Checking (146) (179) (325) (270) (149) (419)
Passbook and statement (656) 740 84 (1,198) 1,294 96
Money market (333) 1,637 1,304 (520) 3,309 2,789
Certificates (1,267) 3,972 2,705 (2,998) 5,664 2,666
------- -------- ------- ------- ------- -------
Total deposits (2,402) 6,170 3,768 (4,986) 10,118 5,132
------- -------- ------- ------- ------- -------
Borrowings:
Securities sold under
repurchase agreements 2,066 619 2,685 4,007 1,490 5,497
FHLB advances (1,754) 725 (1,029) (698) 2,070 1,372
Subordinated debt (16) 14 (2) (17) (16) (33)
Collateralized obligations (15) 168 153 (34) 387 353
Other borrowings 51 94 145 95 132 227
------- -------- ------- ------- ------- -------
Total borrowings 332 1,620 1,952 3,353 4,063 7,416
------- -------- ------- ------- ------- -------
Total interest expense (2,070) 7,790 5,720 (1,633) 14,181 12,548
------- -------- ------- ------- ------- -------
Net interest expense $ 3,514 $ 7,268 $10,782 $ 7,279 $15,023 $22,302
------- -------- ------- ------- ------- -------
------- -------- ------- ------- ------- -------
PROVISIONS FOR CREDIT AND REAL ESTATE LOSSES
TCF provided $2.9 million for credit losses in the second quarter of 1995,
compared with $1.3 million for the same prior-year period. In the first six
months of 1995, TCF provided $9.6 million for credit losses, compared with $4
million for the first six months of 1994. Net charge-offs were $2.8 million
and $3.5 million for the second
12
quarter and first six months of 1995, respectively, compared with $569,000 and
$4 million during the same 1994 periods. The provision for real estate losses
for the second quarter of 1995 was $378,000, compared with $1.8 million for the
same prior-year period. In the first six months of 1995, TCF provided
$541,000 for real estate losses, compared with $2.6 million for the first six
months of 1994. The provision for credit losses in the first six months of
1995 includes $5 million in merger-related provisions, which were established
to conform Great Lakes' accounting and credit loss reserve practices and
methods to those of TCF and to allow for the accelerated disposition of Great
Lakes' remaining problem assets.
Consumer finance lending is generally considered to involve a higher level of
risk than single-family residential lending. The underwriting criteria for
loans originated by TCF's consumer finance offices are generally less
stringent than those historically adhered to by the Company and as a result
these loans have a higher level of credit risk and higher interest rates.
TCF believes that it has in place experienced personnel and acceptable
standards for maintaining credit quality that are consistent with its goals
for expanding its portfolio of these higher-yielding loans. TCF's greater
than 30-day delinquency ratio on gross consumer loans was .93% at June 30,
1995, compared with .77% at December 31, 1994.
TCF's investments in commercial real estate loans and commercial business
loans have decreased significantly in recent years. TCF is seeking to expand
its commercial real estate and commercial business lending activity to
borrowers located in its primary markets of Minnesota, Illinois, Wisconsin,
Michigan and other Midwestern states in an attempt to maintain the size of
these lending portfolios and, where feasible under local economic conditions,
achieve some growth in these lending categories over time. These loans
generally have larger individual balances and a substantially greater
inherent risk of loss. The risk of loss on such loans is difficult to
quantify and is subject to fluctuations in real estate values. At June 30,
1995, the allowances for loan and real estate losses and industrial revenue
bond reserves totaled $66.8 million, compared with $61.7 million at
year-end 1994. See "Financial Condition -- Allowances for Loan and Real
Estate Losses and Industrial Revenue Bond Reserves" for additional
information.
13
NON-INTEREST INCOME
Non-interest income, excluding the gain on sale of branches, increased $1.9
million, or 6%, to $33 million for the second quarter of 1995, compared with
$31.2 million for the same period in 1994. This increase is primarily due to
increases in fee and service charge revenues, data processing revenue and
gains on sales of loan servicing, partially offset by a decrease in
commissions on sales of annuities. For the six months ended June 30, 1995,
non-interest income, excluding the gain on sale of branches and the losses
from merger-related asset sales at Great Lakes, totaled $63.2 million, down
slightly from the 1994 first-half total of $64.1 million. The following
table presents the components of non-interest income:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ------------------
(Dollars in thousands) 1995 1994 1995 1994
------- ------- -------- -------
Fee and service charge revenues $22,542 $21,124 $ 43,295 $41,009
Data processing revenue 2,640 2,239 5,064 4,368
Commissions on sales of annuities 2,562 3,081 4,928 5,553
Title insurance revenues 2,867 2,544 5,140 5,268
Gain (loss) on sale of loans held for sale, net (204) (65) 372 959
Gain (loss) on sale of securities available for sale, net 60 (36) 120 2,722
Gain on sale of loan servicing, net 1,006 693 1,529 1,254
Other 1,574 1,582 2,782 3,004
------- ------- -------- -------
33,047 31,162 63,230 64,137
Gain on sale of branches, net 1,061 -- 1,103 --
Merger-related charges:
Loss on sale of securities available for sale, net -- -- (310) --
Loss on sale of mortgage-backed securities, net -- -- (21,037) --
------- ------- -------- -------
$34,108 $31,162 $ 42,986 $64,137
------- ------- -------- -------
------- ------- -------- -------
Data processing revenue totaled $2.6 million and $5.1 million for the second
quarter and first six months of 1995, respectively, representing increases of
17.9% and 15.9% from $2.2 million and $4.4 million for the same 1994 periods.
These increases reflect TCF's efforts to provide and expand electronic
banking transaction services through its automated teller machine ("ATM")
network. TCF's ATM network consisted of 696 ATM's at June 30, 1995, and the
Company anticipates installing additional ATM's during the remainder of 1995.
Commissions on sales of annuities totaled $2.6 million and $4.9 million
during the second quarter and first six months of 1995, respectively,
compared with $3.1 million and $5.6 million for the same periods in 1994.
Sales of annuities may fluctuate from period to period, and future sales
levels will depend upon continued favorable tax treatment, the level of
interest rates, general economic conditions and investor preferences.
Title insurance revenues totaled $2.9 million and $5.1 million during the
second quarter and first six months of 1995, respectively, compared with $2.5
million and $5.3 million for the same 1994 periods. Title insurance revenues
are cyclical in nature and are largely dependent on market interest rates and
the level of residential loan originations and refinancings.
14
Losses on sales of loans held for sale totaled $204,000 during the second
quarter of 1995, compared with $65,000 during the same period in 1994. For
the six months ended June 30, 1995, TCF recognized gains on sales of loans
held for sale of $372,000, compared with $959,000 during the same 1994
period. TCF adopted Statement of Financial Accounting Standards ("SFAS") No.
122, "Accounting for Mortgage Servicing Rights," on a prospective basis
effective April 1, 1995. As a result, approximately $1 million of net
originated mortgage servicing rights were capitalized in the 1995 second
quarter. See Note 2 of Notes to Consolidated Financial Statements for
additional information. Gains on sales of securities available for sale
totaled $60,000 for the second quarter of 1995, compared with a loss of
$36,000 during the same period in 1994. For the six months ended June
30,1995, gains on sales of securities available for sale, excluding
merger-related sales, totaled $120,000, compared with $2.7 million for the
same 1994 period. Gains or losses on sales of loans held for sale and
securities available for sale may fluctuate significantly from period to
period due to changes in interest rates and volumes, and results in any
period related to these transactions may not be indicative of results which
will be obtained in future periods.
During the second quarter of 1995, TCF Bank Minnesota fsb ("TCF Minnesota")
recognized a $1.1 million net gain on the sale of three branches located
outside its primary metropolitan retail markets.
The results for the second quarter and first six months of 1995 include
pretax gains of $1 million and $1.5 million on the sale of $92.9 million and
$143.9 million, respectively, of third-party loan servicing rights. TCF's
results for the second quarter and first six months of 1994 included pretax
gains of $693,000 and $1.3 million on the sale of $42.3 million and $81.5
million, respectively, of third-party loan servicing rights. TCF
periodically sells loan servicing rights depending on market conditions.
TCF's residential loan servicing portfolio totaled $7.2 billion at June 30,
1995, down slightly from year-end 1994.
During the first quarter of 1995, Great Lakes sold $176.1 million of private
issuer collateralized mortgage obligations and $56.1 million of FNMA and
FHLMC collateralized mortgage obligations from its held to maturity
portfolio. The sales were completed to reduce Great Lakes' interest-rate
and credit-loss risk to levels consistent with TCF's existing interest-rate
risk position and credit-loss risk policy. The fair values of the
collateralized mortgage obligations at the time of sale were $211.2 million.
As a result, a pretax loss of $21 million was recorded on these sales during
the first quarter of 1995.
Also in the 1995 first quarter, Great Lakes sold $17.3 million of
mortgage-backed securities, private issuer collateralized mortgage
obligations, corporate securities and structured notes from its available for
sale portfolio at a pretax loss of $310,000. These sales were also completed
as part of TCF's strategy to reduce Great Lakes' interest-rate and
credit-loss risk to levels consistent with those of TCF.
15
NON-INTEREST EXPENSE
Non-interest expense (excluding the provision for real estate losses and
merger-related charges) totaled $71.3 million for the second quarter of
1995, up 6.3% from $67 million for the same 1994 period. For the first six
months of 1995, non-interest expense, excluding the items noted above,
totaled $142.1 million, up 6.1% from $133.9 million for the same 1994 period.
The increased expenses in 1995 were primarily due to costs associated with
expanded consumer lending and consumer finance operations, and other retail
banking activities. The following table presents the components of
non-interest expense:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ --------------------
(Dollars in thousands) 1995 1994 1995 1994
------- ------- -------- --------
Compensation and employee benefits $34,233 $31,642 $ 69,886 $ 62,618
Occupancy and equipment, net 12,517 11,802 25,012 23,839
Advertising and promotions 4,275 3,604 8,727 7,218
Federal deposit insurance premiums and assessments 3,451 3,882 6,923 7,765
Amortization of goodwill and other intangibles 791 822 1,581 1,645
Other 15,989 15,294 29,968 30,830
------- ------- -------- --------
71,256 67,046 142,097 133,915
Provision for real estate losses 378 1,828 541 2,627
Merger-related charges
Merger-related expenses -- -- 21,733 --
Cancellation cost on early termination of
interest-rate exchange agreements -- -- 4,423 --
------- ------- -------- --------
$71,634 $68,874 $168,794 $136,542
------- ------- -------- --------
------- ------- -------- --------
Compensation and employee benefits expense totaled $34.2 million and $69.9
million for the 1995 second quarter and first six months, respectively,
compared with $31.6 million and $62.6 million for the same periods in 1994.
The increases in 1995 were primarily due to the expansion of consumer
lending, consumer finance operations and other retail banking activities. As
the restructuring of Great Lakes' operations will not be completed until the
third quarter of 1995, TCF did not experience the full benefit of the expense
reductions in the first six months of 1995.
Advertising and promotion expenses totaled $4.3 million and $8.7 million for
the second quarter and first six months of 1995, respectively, compared with
$3.6 million and $7.2 million for the same 1994 periods. The increases in
1995 reflect the increase in direct mail and other marketing expenses
relating to the promotion of TCF's consumer lending and deposit products.
Federal deposit insurance premiums and assessments totaled $3.5 million and
$6.9 million for the 1995 second quarter and first six months,
respectively, compared with $3.9 million and $7.8 million for the same
periods in 1994. The decreases in 1995 were primarily due to lower deposit
levels and a decrease in the deposit insurance premium rates of TCF
Minnesota's wholly owned bank subsidiaries, TCF Bank Wisconsin fsb ("TCF
Wisconsin") and TCF Bank Illinois fsb ("TCF Illinois"), subsequent to their
acquisition by TCF. Savings institutions face the prospect of significantly
higher deposit insurance premiums than those paid by banks, and this may have
an adverse effect on TCF's ability to attract and retain deposits. In
addition, the U.S. Department of the Treasury recently disclosed that it is
considering a plan to recapitalize the Savings Association Insurance Fund
("SAIF") that would entail charging savings institutions approximately $6
billion in the form of a special
16
assessment, among other proposals under consideration. The special
assessment, recently estimated to range from .78% to .90% of total insured
deposits, or approximately $41.6 million to $48 million pretax for TCF, would
be in addition to TCF's annual deposit insurance premium. Deposit insurance
premium rates would likely decline following such a charge. It is too early
to predict whether the proposed special assessment will be approved, or, if
approved, when it will be charged.
Other non-interest expense totaled $16 million and $30 million for the second
quarter and first six months of 1995, respectively, compared with $15.3
million and $30.8 million for the same 1994 periods. The $695,000 increase
for the second quarter of 1995 reflects increases of $457,000 in
telecommunication expense due to expansion and $391,000 in real estate
operations expense, partially offset by a $689,000 decrease in loan expense.
The $862,000 decrease for the first six months of 1995 is primarily due to a
$1.3 million decrease in loan expense. The decreases in loan expense reflect
decreased residential loan origination activity.
Included in merger-related expenses for the first quarter of 1995 are $13.9
million of equipment charges which reflect costs associated with the
integration of Great Lakes' data processing system into TCF's and the
write-off of certain redundant data processing equipment and software. In
the first quarter of 1995, approximately $13.4 million of redundant equipment
was written off. In addition, an accrual of $500,000 was established for
data processing contract cancellation costs, $217,000 of which was paid in
the first six months of 1995. The data processing integration was completed
in July 1995.
Merger-related expenses for the first quarter of 1995 include $4.7 million
of employment contract, severance and employee benefit costs reflecting the
consolidation of certain functions such as data processing, investments and
certain other back office operations. A reduction of approximately 200
employees in the combined work force is expected as a result of the
consolidation of these functions, of which approximately 155 occurred through
June 30, 1995. The severance benefit arrangement has been communicated to
all employees affected by the consolidation of certain functions, and
generally provides for a minimum of one month of severance up to a maximum of
seven months depending upon years of service and job classification. In
addition, staying bonuses with higher levels of employee benefits were
offered to certain individuals in addition to the severance benefits.
Approximately $2 million of severance and employee benefit costs were paid in
the first six months of 1995.
In the first quarter of 1995, approximately $2.2 million of merger-related
expenses for professional services, including investment advisor, legal and
accounting services, and $864,000 of other expenses were incurred by Great
Lakes as a direct result of the merger.
In the first quarter of 1995, Great Lakes terminated $544.5 million of
high-cost interest-rate exchange agreements at a pretax loss of $4.4
million. The agreements were terminated in connection with the asset sales
and paydown of wholesale borrowings as part of the merger-related
restructuring activities. Upon completion of the termination actions, Great
Lakes is no longer a party to any interest-rate exchange agreements.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 applies to all entities and to
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and to long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 does not apply to
financial instruments, long-term customer relationships of a financial
institution (for example, deposit base intangibles and credit cardholder
intangibles), mortgage and other servicing rights, deferred policy
acquisition costs,
17
or deferred tax assets. Under the provisions of SFAS No. 121, an entity
shall review long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 applies to
financial statements issued for fiscal years beginning after December 15,
1995, with earlier application encouraged. Management has not yet determined
what effect, if any, this pronouncement will have on TCF's financial
condition or results of operations.
INCOME TAXES
TCF recorded income tax expense of $15.4 million and $7.8 million for the
second quarter and first six months of 1995, respectively, or 39.8% of pretax
income before extraordinary items, compared with $11.7 million and $22.3
million, or 39.7% and 39.6%, respectively, for the comparable 1994 periods.
ASSET/LIABILITY MANAGEMENT -- INTEREST-RATE RISK
TCF's results of operations are dependent to a large degree on its net
interest income, which is the difference between interest income and interest
expense. Like most financial institutions, TCF's interest income and cost of
funds are significantly affected by general economic conditions and by
policies of regulatory authorities. The mismatch between maturities and
interest rate sensitivities of assets and liabilities results in
interest-rate risk. Although the measure is subject to a number of
assumptions and is only one of a number of measurements, management believes
the interest rate gap (difference between interest-earning assets and
interest-bearing liabilities repricing within a given period) is an
important indication of TCF's exposure to interest-rate risk and the related
volatility of net interest income in a changing interest rate environment.
In addition to the interest rate gap analysis, management also utilizes a
simulation model to measure and manage TCF's interest-rate risk.
For an institution with a negative interest rate gap for a given period, the
amount of its interest-bearing liabilities maturing or otherwise repricing
within such period exceeds the amount of interest-earning assets repricing
within the same period. In a rising interest rate environment, institutions
with negative interest rate gaps will generally experience more immediate
increases in the cost of their liabilities than in the yield on their assets.
Conversely, the yield on assets of institutions with negative interest rate
gaps will generally decrease more slowly than the cost of their funds in a
falling interest rate environment.
As a result of the Great Lakes acquisition, TCF's exposure to rising and
falling interest rates has increased slightly. TCF's strategy is to reduce
this interest-rate risk over time by continuing to emphasize growth in core
deposits and higher yielding home equity and other consumer loans, and by
extending the maturities on borrowings. Consistent with this strategy, TCF
extended the maturities on $75 million of borrowings and converted $68
million of variable-rate FHLB advances to long-term fixed rate FHLB
advances in the 1995 second quarter. In addition, the Company sold $45.6
million of long-term fixed-rate securities available for sale and paid down
short-term borrowings. TCF's one-year adjusted interest rate gap at June
30, 1995 reflects these transactions and was a negative $50 million, or (1)%
of total assets, compared with a negative $511.6 million, or (7)% of total
assets, at December 31, 1994.
TCF's Asset/Liability Management Committee manages TCF's interest-rate risk
based on interest rate expectations and other factors. The amounts in the
maturity/rate sensitivity table below represent management's estimates and
assumptions, which in some cases may differ from regulatory assumptions.
Also, the amounts could be significantly affected by external factors such as
prepayment rates other than those assumed, early withdrawals of deposits,
changes in the correlation of various interest-bearing instruments, and
competition. Decisions by management to purchase or sell assets, or retire
debt could change the maturity/repricing and spread relationships.
18
The following table summarizes TCF's one-year adjusted interest rate gap at
June 30, 1995:
Maturity/Rate Sensitivity
-------------------------
(Dollars in thousands)
Within One Year
---------------
Interest-earning assets:
Loans held for sale $ 260,605
Securities available for sale 23,094
Mortgage-backed securities held to maturity (1) 325,501
Real estate loans (1) 1,497,070
Other loans (1) 1,446,533
Investments (2) 64,874
----------
3,617,677
----------
Interest-bearing liabilities:
Deposits (3) 2,697,196
FHLB advances 318,739
Borrowings 656,765
----------
3,672,700
----------
Interest-bearing liabilities over interest-earning assets
(primary gap) (55,023)
Impact of interest-rate exchange agreement 5,000
----------
One-year adjusted gap $ (50,023)
----------
----------
One-year adjusted gap as a percentage of total assets:
At June 30, 1995 (1)%
----------
----------
At December 31, 1994 (7)%
----------
----------
<FN>
(1) Based upon a) contractual maturity, b) repricing date, if applicable,
c) scheduled repayments of principal and d) projected prepayments of
principal based upon experience.
(2) Includes interest-bearing deposits with banks, federal funds sold, U.S.
Government and other marketable securities held to maturity and FHLB
stock.
(3) Includes noninterest-bearing deposits. Money market accounts, 12% of
checking accounts and 22% of passbook and statement accounts are included
in amounts repricing within one year. All remaining checking and
passbook and statement accounts are assumed to mature in periods
subsequent to one year. While management believes these assumptions are
well based, no assurance can be given that amounts on deposit in
checking and passbook and statement accounts will not significantly
decrease or be repriced in the event interest rates rise.
19
FINANCIAL CONDITION
INVESTMENTS
Total investments decreased $218.2 million from year-end 1994 to $64.9
million at June 30, 1995, reflecting decreases of $191.5 million in
interest-bearing deposits with banks, $19.9 million in FHLB stock and $6.9
million in federal funds sold. The proceeds from these maturities were used
to repay borrowings. See "Financial Condition -- Borrowings."
SECURITIES AVAILABLE FOR SALE
Securities available for sale are carried at fair value with unrealized gains
and losses, net of deferred income taxes, reported as a separate component of
stockholders' equity. Securities available for sale decreased $99.9 million
from year-end 1994 to $38.6 million at June 30, 1995. The decrease was
partially due to maturities and the previously described Great Lakes' sale of
$17.3 million of securities available for sale in the first quarter of 1995.
The decrease was also partially due to the sale of $45.6 million of
securities available for sale in the second quarter of 1995. The following
table summarizes securities available for sale as of June 30, 1995 and
December 31, 1994:
June 30, 1995 December 31, 1994
------------------ --------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
--------- ------- --------- --------
U.S. Government and other marketable securities:
U.S. Government and agency obligations $ 1,005 $ 1,019 $ 54,462 $ 54,298
Corporate bonds 5,000 5,000 15,202 14,918
Commercial paper -- -- 14,955 14,843
Marketable equity securities 3 43 3 30
--------- ------- --------- --------
6,008 6,062 84,622 84,089
--------- ------- --------- --------
Mortgage-backed securities:
Mortgage-backed securities 13,843 12,196 45,841 44,697
Collateralized mortgage obligations 20,979 20,317 9,611 9,644
--------- ------- --------- --------
34,822 32,513 55,452 54,341
--------- ------- --------- --------
$40,830 $38,575 $140,074 $138,430
--------- ------- --------- --------
--------- ------- --------- --------
LOANS HELD FOR SALE
Residential real estate and education loans held for sale are carried at the
lower of cost or market. Loans held for sale increased $59.1 million from
year-end 1994, totaling $260.6 million at June 30, 1995. Residential real
estate loans held for sale increased $40.7 million to $86.5 million at June
30, 1995, as production levels exceeded loan sales activity during the first
six months of 1995. Education loans held for sale increased $18.3 million to
$173.8 million at June 30, 1995, reflecting management's intention to hold a
larger portfolio of these loans due to the higher yields received on the
loans as compared with alternative short-term investments.
20
The following table summarizes loans held for sale as of June 30, 1995 and
December 31, 1994:
June 30, December 31,
(In thousands) 1995 1994
-------- ------------
Residential real estate $ 86,480 $ 45,744
Education 173,825 155,524
-------- --------
260,305 201,268
Less:
Deferred loan costs, net (545) (489)
Unearned discounts, net 245 246
-------- --------
$260,605 $201,511
-------- --------
-------- --------
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity are carried at amortized cost.
Mortgage-backed securities totaled $1.3 billion at June 30, 1995, a decrease
of $349.5 million from December 31, 1994. This decrease is primarily due to
the previously described Great Lakes' sale of $232.2 million of
collateralized mortgage obligations, and repayment and prepayment activity.
In addition to selling certain collateralized mortgage obligations from its
held to maturity portfolio, Great Lakes also transferred $38.4 million of
private issuer mortgage-backed securities and collateralized mortgage
obligations from its held to maturity portfolio to its securities available
for sale portfolio in the first quarter of 1995. The transfers are
consistent with the strategy to reduce Great Lakes' interest-rate and
credit-loss risk to levels consistent with those of TCF. At June 30, 1995
and December 31, 1994, TCF's mortgage-backed securities held to maturity
portfolio had gross unrealized gains of $16.1 million and $3.6 million,
respectively, and gross unrealized losses of $7.2 million and $92.2 million,
respectively.
The following table summarizes mortgage-backed securities held to maturity
as of June 30, 1995 and December 31, 1994:
June 30, December 31,
(In thousands) 1995 1994
---------- -----------
Mortgage-backed securities:
Agency $1,230,442 $1,303,606
Private issuers 16,465 31,261
---------- -----------
1,246,907 1,334,867
---------- -----------
Collateralized mortgage obligations:
Agency -- 84,347
Private issuers -- 177,409
---------- -----------
-- 261,756
---------- -----------
Net premiums 4,798 4,577
---------- -----------
$1,251,705 $1,601,200
---------- -----------
---------- -----------
21
LOANS
Total loans increased $211.5 million from year-end 1994 to $5.3 billion at
June 30, 1995. Residential real estate loans increased $67.2 million during
the first six months of 1995 to $2.7 billion. This increase reflects the
origination and retention of $221.7 million of residential loans, partially
offset by loan repayments. Commercial real estate loans decreased $231,000
from year-end 1994. At June 30, 1995, approximately 89% of TCF's commercial
real estate loans outstanding were secured by properties located in its
primary markets. The average individual balance of commercial real estate
loans was $575,000 at June 30, 1995.
TCF continues to expand its consumer lending and consumer finance operations.
During the first six months of 1995, the Company opened 19 new consumer
finance offices, most of which were in areas outside its traditional market
locations. As of June 30, 1995, TCF had 65 such offices in 16 states. As a
result of this expansion, TCF's consumer finance loan portfolio totaled
$289.3 million at June 30, 1995, compared with $201 million at December 31,
1994. TCF anticipates opening five additional consumer finance offices
during the third quarter of 1995. The Company intends to concentrate on
increasing the outstanding loan balances of these existing offices and
improving the profitability of its consumer finance subsidiaries before
opening any additional consumer finance offices. Consumer loans outstanding
increased $166 million during the first six months of 1995, reflecting a
$74.1 million increase in home equity loans and an $88.6 million increase in
automobile, marine and recreational vehicle loans. The growth in home equity
loans and automobile, marine and recreational vehicle loans reflects the
expanded consumer lending and consumer finance operations.
The following table summarizes loans as of June 30, 1995 and December 31,
1994:
June 30, December 31,
(In thousands) 1995 1994
---------- ------------
Residential real estate $2,729,933 $2,662,707
---------- ------------
Commercial real estate:
Apartments 420,449 432,114
Other permanent 525,581 526,773
Construction and development 51,371 38,745
---------- ------------
997,401 997,632
---------- ------------
Total real estate 3,727,334 3,660,339
---------- ------------
Commercial business 193,174 190,975
---------- ------------
Consumer:
Home equity 1,068,605 994,472
Automobile, marine and recreational vehicle 239,193 150,565
Credit card 39,921 34,698
Loans secured by deposits 10,352 9,685
Other 107,365 110,038
---------- ------------
1,465,436 1,299,458
---------- ------------
5,385,944 5,150,772
Less:
Unearned discounts on loans purchased 3,700 4,103
Deferred loan fees, net 10,086 11,456
Unearned discounts and finance charges, net 42,278 16,832
---------- ------------
$5,329,880 $5,118,381
---------- ------------
---------- ------------
At June 30, 1995, the recorded investment in loans that are considered to be
impaired under the criteria established by SFAS No. 114 and SFAS No. 118 was
$33.7 million. All of these loans were on non-accrual status. Included in
this amount are $27.8 million of impaired loans for which the related
allowance for credit losses is $3.6 million and $5.9 million of impaired
loans that, as a result of write-downs, do not have a specific allowance for
credit losses. The average recorded investment in impaired
22
loans during the three and six months ended June 30, 1995 was $31.5 million
and $28 million, respectively. For the three and six months ended June 30,
1995, TCF recognized interest income on impaired loans of $65,000 and
$87,000, respectively, all of which was recognized using the cash basis
method of income recognition.
Included in performing loans at June 30, 1995 are commercial real estate and
commercial business loans aggregating $2.9 million with terms that have been
modified in troubled debt restructurings, compared with $4.3 million at
December 31, 1994.
The results of hotel and motel operations have suffered in recent years.
Included in commercial real estate loans at June 30, 1995 are $101.4 million
of loans secured by hotel or motel properties. Seven loans comprise $56.2
million, or 55%, of the total hotel and motel portfolio. Of the total hotel
and motel portfolio balance, six loans totaling $20.6 million are included in
loans subject to management concern and five loans totaling $6.9 million are
included in non-accrual loans. TCF continues to closely monitor the
performance of these loans and properties.
NON-PERFORMING ASSETS
Non-performing assets (principally non-accrual loans and real estate
acquired through foreclosure) totaled $70.2 million at June 30, 1995, up
$12.5 million from the December 31, 1994 total of $57.6 million. At June 30,
1995, 13 loans or properties comprised $31.5 million, or 44.8%, of total
non-performing assets. These loans or properties had been written down by
$9.1 million as of June 30, 1995. Properties acquired are being actively
marketed. Approximately 85% of the non-performing assets at June 30, 1995
consisted of, or were secured by, real estate. Non-performing assets are
summarized in the table below.
June 30, December 31,
(Dollars in thousands) 1995 1994
------- ------------
Loans (1):
Residential real estate $ 5,629 $ 7,211
Commercial real estate 24,831 18,452
Commercial business 8,920 5,972
Consumer 2,733 2,127
------- ---------
42,113 33,762
Real estate and other assets (2) 28,046 23,849
------- ---------
Total non-performing assets $70,159 $57,611
------- ---------
------- ---------
Non-performing assets as a percentage
of net loans 1.33% 1.14%
Non-performing assets as a percentage
of total assets .94 .73
<FN>
(1) Included in total loans in the Consolidated Statements of Financial
Condition.
(2) Includes commercial real estate of $14.7 million and $15 million at June
30, 1995 and December 31, 1994, respectively.
TCF had accruing loans 90 days or more past due totaling $2.7 million at June
30, 1995, compared with $2.4 million at December 31, 1994. These loans are
in the process of collection and management believes they are adequately
secured. The over 30-day delinquency rate on TCF's loans and loans held for
sale (excluding non-accrual loans) was .63% of gross loans outstanding at
June 30, 1995, compared with .43% at year-end 1994.
In addition to the non-accrual, restructured and accruing loans 90 days or
more past due, there were commercial real estate and commercial business
loans with an aggregate principal balance of $64.9 million outstanding at
June 30, 1995 for which management has concerns regarding the ability of the
borrowers to meet existing repayment terms.
23
This amount consists of loans that were classified for regulatory purposes as
substandard, doubtful or loss, or were to borrowers that currently are
experiencing financial difficulties or that management believes may
experience financial difficulties in the future. This compares with $74.2
million of such loans at December 31, 1994. Although these loans are secured
by commercial real estate or other corporate assets, they may be subject to
future modifications of their terms or may become non-performing. Management
is monitoring the performance and classification of such loans and the
financial condition of these borrowers.
ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES AND INDUSTRIAL REVENUE BOND RESERVES
The following tables summarize the activity of the allowances for loan and
real estate losses and the industrial revenue bond reserves (dollars in
thousands):
Three Months Ended Six Months Ended
June 30, 1995 June 30, 1995
------------------------------------- -------------------------------------
Industrial Industrial
Revenue Revenue
Allowance for Loan Losses and Allowance for Bond Allowance for Bond
Industrial Revenue Bond Reserves: Loan Losses Reserves Total Loan Losses Reserves Total
------------- ---------- ------- ------------- ---------- -------
Balance (beginning of period) $62,383 $2,684 $65,067 $56,343 $2,759 $59,102
Provision for credit losses 2,999 (75) 2,924 9,762 (150) 9,612
Charge-offs (4,514) -- (4,514) (6,887) -- (6,887)
Recoveries 1,728 -- 1,728 3,378 -- 3,378
------- ------ ------- ------- ------ -------
Net charge-offs (2,786) -- (2,786) (3,509) -- (3,509)
------- ------ ------- ------- ------ -------
Balance (end of period) $62,596 $2,609 $65,205 $62,596 $2,609 $65,205
------- ------ ------- ------- ------ -------
------- ------ ------- ------- ------ -------
Allowance for loan losses as a
percentage of total gross loans 1.16% 1.16%
Three Months Ended Six Months Ended
June 30, 1994 June 30, 1994
------------------------------------- -------------------------------------
Industrial Industrial
Revenue Revenue
Allowance for Loan Losses and Allowance for Bond Allowance for Bond
Industrial Revenue Bond Reserves: Loan Losses Reserves Total Loan Losses Reserves Total
------------- ---------- ------- ------------- ---------- -------
Balance (beginning of period) $53,581 $2,739 $56,320 $54,444 $2,689 $57,133
Provision for credit losses 1,344 -- 1,344 3,984 -- 3,984
Charge-offs (2,523) -- (2,523) (7,819) -- (7,819)
Recoveries 1,934 20 1,954 3,727 70 3,797
------- ------ ------- ------- ------ -------
Net recoveries (charge-offs) (589) 20 (569) (4,092) 70 (4,022)
------- ------ ------- ------- ------ -------
Balance (end of period) $54,336 $2,759 $57,095 $54,336 $2,759 $57,095
------- ------ ------- ------- ------ -------
------- ------ ------- ------- ------ -------
Allowance for loan losses as a
percentage of total gross loans 1.13% 1.13%
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
Allowance for Real Estate Losses: 1995 1994 1995 1994
------- ------- ------- -------
Balance (beginning of period) $1,973 $2,714 $ 2,576 $ 2,439
Provision for losses 378 1,828 541 2,627
Charge-offs (782) (806) (1,548) (1,330)
------- ------- ------- -------
Balance (end of period) $1,569 $3,736 $ 1,569 $ 3,736
------- ------- ------- -------
------- ------- ------- -------
24
The allowance for loan losses is maintained at a level believed to be
adequate by management to provide for estimated loan losses. Management's
judgment as to the adequacy of the allowance is a result of ongoing review of
larger individual loans, the overall risk characteristics of the portfolio,
changes in the character or size of the portfolio, the levels of
non-performing assets, net charge-offs, geographic location and prevailing
economic conditions. The allowance for loan losses is established for known
or anticipated problem loans, as well as for loans which are not currently
known to require specific allowances. The adequacy of the allowance for loan
losses is highly dependent upon management's estimates of variables affecting
valuation, appraisals of collateral, evaluations of performance and status,
and the amounts and timing of future cash flows expected to be received on
impaired loans. Such estimates, appraisals, evaluations and cash flows may
be subject to frequent adjustments due to changing economic prospects of
borrowers or properties. The unallocated portion of TCF's allowance for loan
losses totaled $20.7 million at June 30, 1995.
Prior to being acquired by TCF, Republic Capital Group had entered into
agreements guaranteeing certain industrial development and housing revenue
bonds issued by municipalities to finance commercial and multi-family real
estate owned by third parties. In the event a third-party borrower defaults
on principal or interest payments on the bonds, TCF, as acquiring entity, is
required to either fund the amount in default or acquire the then outstanding
bonds. TCF may foreclose on the underlying real estate to recover amounts in
default. The balance of such financial guarantees at June 30, 1995 was $16.5
million. Management has considered these guarantees in its review of the
adequacy of the industrial revenue bond reserves.
LIQUIDITY MANAGEMENT
TCF manages its liquidity position to ensure that the funding needs of
depositors and borrowers are met promptly and in a cost-effective manner.
Asset liquidity arises from the ability to convert certain assets to cash as
well as from the maturity of assets. Liability liquidity results from the
ability of TCF to attract a diversity of funding sources to meet funding
requirements promptly. TCF's wholly owned savings bank subsidiaries are
required by federal regulation to maintain a monthly average minimum asset
liquidity ratio of 5%. During the first six months of 1995, these
subsidiaries maintained average monthly liquidity ratios in excess of this
requirement.
25
DEPOSITS
Deposits totaled $5.2 billion at June 30, 1995, down $149.9 million from the
year-end 1994 total. The decrease in deposits reflects a significant runoff
of Great Lakes' brokered deposits and the previously described sale of three
branches. The following table summarizes TCF's deposits at June 30, 1995 and
December 31, 1994:
June 30, 1995 December 31, 1994
------------------------------- -------------------------------
Weighted Weighted
Average % of Average % of
(Dollars in thousands) Rate Amount Total Rate Amount Total
-------- ---------- ----- -------- ---------- -----
Checking:
Non-interest bearing 0.00% $ 533,157 10.2% 0.00% $ 456,867 8.5%
Interest bearing 1.07 536,080 10.2 1.41 574,172 10.6
---------- ----- ---------- -----
.54 1,069,237 20.4 .78 1,031,039 19.1
Passbook and statement 2.09 902,988 17.2 2.13 940,459 17.4
Money market 3.29 624,468 11.9 3.26 646,732 12.0
Certificates 5.58 2,653,126 50.5 5.07 2,781,488 51.5
---------- ----- ---------- -----
3.68 $5,249,819 100.0% 3.53 $5,399,718 100.0%
---------- ----- ---------- -----
---------- ----- ---------- -----
Certificates had the following remaining maturities:
June 30, 1995 December 31, 1994
------------------------------------------- ------------------------------------------
Weighted Weighted
(Dollars in Negotiable Average Negotiable Average
millions) Rate Other Total Rate Rate Other Total Rate
---------- -------- -------- -------- ---------- -------- ------- --------
Maturity:
0-3 months $169.8 $ 527.1 $ 696.9 5.21% $203.2 $ 498.0 $ 701.2 4.74%
4-6 months 22.4 434.0 456.4 5.48 25.4 542.4 567.8 4.84
7-12 months 8.9 585.3 594.2 5.72 46.2 600.7 646.9 4.97
13-24 months 3.6 517.4 521.0 5.75 4.5 432.5 437.0 5.47
25-36 months 1.8 190.4 192.2 5.86 1.2 184.3 185.5 5.52
37-48 months .3 102.6 102.9 5.72 1.8 124.1 125.9 5.75
49-60 months -- 42.7 42.7 5.93 .3 64.9 65.2 5.47
Over 60 months -- 46.8 46.8 6.48 -- 52.0 52.0 6.36
---------- -------- -------- ---------- -------- --------
$206.8 $2,446.3 $2,653.1 5.58 $282.6 $2,498.9 $2,781.5 5.07
---------- -------- -------- ---------- -------- --------
---------- -------- -------- ---------- -------- --------
Included in deposits at June 30, 1995 and December 31, 1994 are $38.8 million
and $147.2 million, respectively, of brokered deposits acquired primarily as
a result of the Great Lakes acquisition.
BORROWINGS
Borrowings are used primarily to fund the purchase of investments and
mortgage-backed securities. These borrowings totaled $1.6 billion as of
June 30, 1995, down $295.1 million from year-end 1994. The decrease was
primarily due to a $548.9 million decrease in FHLB advances, including the
previously mentioned prepayment of $112.3 million of higher-rate FHLB
advances as part of the merger-related activities at Great Lakes, partially
offset by an increase in securities sold under repurchase agreements of
$242.9 million. As part of its strategy to reduce interest-rate risk, TCF
extended the maturities on $75 million of borrowings, converted $68 million
of variable-rate FHLB advances to long-term fixed-rate FHLB advances, and
repaid short-term borrowings. See "Results of Operations -- Asset/Liability
Management -- Interest-Rate Risk." The weighted average rate on borrowings
was 6.28% at June 30, 1995, relatively unchanged from year-end 1994.
26
TCF's borrowings consist of the following:
June 30, 1995 December 31, 1994
--------------------- ---------------------
Weighted Weighted
Year of Average Average
(Dollars in thousands) Maturity Amount Rate Amount Rate
-------- ---------- -------- ---------- --------
Securities sold under
repurchase agreements 1995 $ 597,409 6.14% $ 429,469 5.78%
1997 75,000 6.12 -- --
---------- ----------
672,409 6.13 429,469 5.78
---------- ----------
Federal Home Loan Bank
advances 1995 176,639 6.07 661,405 6.17
1996 328,100 5.83 386,900 6.15
1997 91,014 6.11 76,014 6.54
1998 73,000 6.00 73,000 5.80
1999 103,000 6.83 123,000 6.98
2000 8,074 7.34 8,074 7.34
2001 25,000 7.33 25,000 7.33
2008 337 6.27 345 6.27
2009 617 6.52 925 6.86
---------- ----------
805,781 6.12 1,354,663 6.27
---------- ----------
Subordinated debt:
Subordinated capital notes
of TCF Financial
Corporation, callable
beginning January 1, 1995 2002 34,500 10.00 34,500 10.00
Senior subordinated
debentures 2006 6,248 18.00 6,248 18.00
Convertible subordinated
debentures 2011 8,128 7.25 9,928 7.25
---------- ----------
48,876 10.57 50,676 10.45
---------- ----------
Collateralized obligations:
Collateralized notes 1997 37,500 6.31 37,500 6.81
Less unamortized discount 74 -- 90 --
---------- ----------
37,426 6.32 37,410 6.83
---------- ----------
Collateralized mortgage
obligations 2006 44 6.50 488 6.50
2008 3,000 6.50 3,000 6.50
2010 1,486 5.90 1,443 5.90
---------- ----------
4,530 6.30 4,931 6.32
Less unamortized discount 255 -- 306 --
---------- ----------
4,275 6.68 4,625 6.74
---------- ----------
41,701 6.36 42,035 6.82
---------- ----------
Other borrowings:
Federal funds purchased 1995 15,000 6.62 1,500 6.13
Industrial development
revenue bonds 2015 3,070 4.90 3,125 4.65
Bank loan, maturing
serially through 1998 1998 3,000 10.00 3,500 9.50
Other 1998 24 7.60 27 7.60
---------- ----------
21,094 6.85 8,152 7.01
---------- ----------
$1,589,861 6.28 $1,884,995 6.29
---------- ----------
---------- ----------
27
At June 30, 1995, borrowings with a maturity of one year or less consisted
of the following:
Weighted
Average
(Dollars in thousands) Amount Rate
--------- --------
Securities sold under repurchase agreements $597,409 6.14%
Federal Home Loan Bank advances 276,739 4.14
Federal funds purchased 15,000 6.62
Bank loan 1,000 10.00
--------
$890,148 5.53
--------
--------
STOCKHOLDERS' EQUITY
Stockholders' equity was $495.6 million at June 30, 1995, or 6.7% of total
assets, up from $475.5 million, or 6.1% of total assets, at December 31,
1994. The increase in stockholders' equity is primarily due to net income of
$10.8 million for the first six months of 1995, and the receipt of $15.5
million on the exercise of stock options and common stock warrants, partially
offset by the payment of $9.9 million in common stock dividends. The common
stock warrants, which were assumed in connection with the acquisition of
Great Lakes, expired July 1, 1995. On July 3, 1995, TCF redeemed its 2.7
million shares of preferred stock at $10 per share. The final dividend on
the preferred stock was declared in the first quarter of 1995 and paid on
April 17, 1995. As previously mentioned, TCF issued the preferred stock in
exchange for Great Lakes preferred stock.
On July 25, 1995, TCF declared a quarterly dividend of 31.25 cents per common
share payable on August 31, 1995 to stockholders of record as of August 11,
1995.
REGULATORY CAPITAL REQUIREMENTS
The following tables set forth the calculations of the tangible, core and
risk-based capital levels and applicable percentages of adjusted assets for
TCF's wholly owned savings bank subsidiaries, TCF Minnesota and Great Lakes,
at June 30, 1995 and December 31, 1994 together with the excess over the
minimum capital requirements (dollars in thousands):
TCF Minnesota: June 30, 1995 December 31, 1994
--------------------- ---------------------
Amount Percentage Amount Percentage
-------- ---------- -------- ----------
Tangible capital $294,616 6.15% $292,825 5.81%
Tangible capital requirement 71,875 1.50 75,634 1.50
-------- ---------- -------- ----------
Excess $222,741 4.65% $217,191 4.31%
-------- ---------- -------- ----------
-------- ---------- -------- ----------
Core capital $296,231 6.18% $320,673 6.34%
Core capital requirement 143,798 3.00 151,704 3.00
-------- ---------- -------- ----------
Excess $152,433 3.18% $168,969 3.34%
-------- ---------- -------- ----------
-------- ---------- -------- ----------
Risk-based capital $326,346 11.13% $350,096 12.01%
Risk-based capital requirement 234,561 8.00 233,292 8.00
-------- ---------- -------- ----------
Excess $ 91,785 3.13% $116,804 4.01%
-------- ---------- -------- ----------
-------- ---------- -------- ----------
28
Great Lakes: June 30, 1995 December 31, 1994
--------------------- ---------------------
Amount Percentage Amount Percentage
-------- ---------- -------- ----------
Tangible capital $159,412 6.08% $148,482 5.35%
Tangible capital requirement 39,332 1.50 41,626 1.50
-------- ---------- -------- ----------
Excess $120,080 4.58% $106,856 3.85%
-------- ---------- -------- ----------
-------- ---------- -------- ----------
Core capital $171,280 6.50% $148,482 5.35%
Core capital requirement 79,019 3.00 83,252 3.00
-------- ---------- -------- ----------
Excess $ 92,261 3.50% $ 65,230 2.35%
-------- ---------- -------- ----------
-------- ---------- -------- ----------
Risk-based capital $202,838 12.34% $181,594 11.08%
Risk-based capital requirement 131,506 8.00 131,140 8.00
-------- ---------- -------- ----------
Excess $ 71,332 4.34% $ 50,454 3.08%
-------- ---------- -------- ----------
-------- ---------- -------- ----------
At June 30, 1995, TCF Minnesota and its wholly owned savings bank
subsidiaries, TCF Illinois and TCF Wisconsin, and Great Lakes exceeded their
fully phased-in capital requirements and believe that they would be
considered well-capitalized under guidelines established pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991.
29
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Supplementary Information
QUARTERLY FINANCIAL DATA (Unaudited)
--------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, At At At At At At
except per-share data) June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1995 1995 1994 1994 1994 1994
--------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA:
Total assets $7,432,692 $7,369,061 $7,845,588 $7,830,976 $7,725,299 $7,725,961
Investments(1) 64,874 91,969 283,104 363,104 408,475 322,367
Securities available for sale 38,575 89,693 138,430 186,146 142,071 392,972
Mortgage-backed securities held to maturity 1,251,705 1,291,370 1,601,200 1,670,848 1,715,841 1,590,669
Loans 5,329,880 5,237,533 5,118,381 4,961,496 4,794,255 4,687,941
Deposits 5,249,819 5,371,461 5,399,718 5,407,766 5,442,527 5,588,007
Federal Home Loan Bank advances 805,781 879,184 1,354,663 992,677 1,127,918 1,131,639
Subordinated debt 48,876 50,676 50,676 50,676 50,676 50,676
Other borrowings 735,204 515,467 479,656 828,012 564,832 417,268
Stockholders' equity 495,550 470,501 475,469 460,221 444,972 435,398
--------------------------------------------------------------------------------------------------------------------------
Three Months Ended
--------------------------------------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1995 1995 1994 1994 1994 1994
--------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATIONS DATA:
Interest income $151,641 $148,791 $145,592 $141,308 $135,139 $130,443
Interest expense 72,349 73,143 71,978 68,408 66,629 66,315
-------- -------- -------- -------- -------- --------
Net interest income 79,292 75,648 73,614 72,900 68,510 64,128
Provision for credit losses 2,924 6,688 3,556 3,262 1,344 2,640
-------- -------- -------- -------- -------- --------
Net interest income after provision for
credit losses 76,368 68,960 70,058 69,638 67,166 61,488
-------- -------- -------- -------- -------- --------
Non-interest income:
Loss on sale of mortgage-backed securities,
net -- (21,037) -- -- -- --
Gain on sale of loan servicing, net 1,006 523 581 518 693 561
Gain (loss) on sale of securities available
for sale, net 60 (250) (1,689) (52) (36) 2,758
Gain on sale of branches, net 1,061 42 -- -- -- --
Other non-interest income 31,981 29,600 30,331 31,393 30,505 29,656
-------- -------- -------- -------- -------- --------
Total non-interest income 34,108 8,878 29,223 31,859 31,162 32,975
-------- -------- -------- -------- -------- --------
Non-interest expense:
Provision for real estate losses 378 163 713 682 1,828 799
Amortization of goodwill and other intangibles 791 790 814 823 822 823
Merger-related expenses -- 21,733 -- -- -- --
Cancellation cost on early termination of
interest-rate exchange agreements -- 4,423 -- -- -- --
Other non-interest expense 70,465 70,051 69,769 67,641 66,224 66,046
-------- -------- -------- -------- -------- --------
Total non-interest expense 71,634 97,160 71,296 69,146 68,874 67,668
-------- -------- -------- -------- -------- --------
Income (loss) before income tax expense
(benefit) and extraordinary item 38,842 (19,322) 27,985 32,351 29,454 26,795
Income tax expense (benefit) 15,448 (7,683) 11,230 12,917 11,692 10,563
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item 23,394 (11,639) 16,755 19,434 17,762 16,232
Extraordinary item:
Penalties on early repayment of FHLB advances,
net of tax benefit of $578 -- (963) -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss) 23,394 (12,602) 16,755 19,434 17,762 16,232
Dividends on preferred stock -- 678 677 678 677 678
-------- -------- -------- -------- -------- --------
Net income (loss) available to common
shareholders $ 23,394 $(13,280) $ 16,078 $ 18,756 $ 17,085 $ 15,554
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Per common share:
Income (loss) before extraordinary item $ 1.31 $ (.72) $ .93 $ 1.09 $ .99 $ .90
Extraordinary item -- (.05) -- -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss) $ 1.31 $ (.77) $ .93 $ 1.09 $ .99 $ .90
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Dividends declared $ .3125 $ .25 $ .25 $ .25 $ .25 $ .25
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
FINANCIAL RATIOS:
Return on average assets (2) 1.27% (.67)% .89% 1.03% .94% .87%
Return on average common equity (2) 20.48 (11.86) 14.56 17.58 16.48 15.24
Average total equity to average assets 6.53 6.33 6.18 5.98 5.83 5.78
Net interest margin (2)(3) 4.58 4.31 4.16 4.11 3.88 3.67
<FN>
------------------------
(1) Includes interest-bearing deposits with banks, federal funds sold, U.S.
Government and other marketable securities held to maturity, securities
purchased under resale agreements and FHLB stock.
(2) Annualized.
(3) Net interest income divided by average interest-earning assets.
30
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Supplementary Information (Continued)
Consolidated Average Balance Sheets, Interest and Dividends
Earned or Paid, and Related Interest Yields and Rates
Six Months Ended June 30,
------------------------------------------------------------------------------
1995 1994
-------------------------------------- -------------------------------------
Interest Interest
Average Yields and Average Yields and
(Dollars in thousands) Balance Interest(1) Rates(2) Balance Interest(1) Rates(2)
---------- ----------- ---------- ---------- ----------- ----------
Assets:
Securities available
for sale $ 79,005 $ 2,902 7.35% $ 326,766 $ 8,868 5.43%
---------- ----------- ---------- -----------
Loans held for sale 208,379 8,573 8.23 280,192 9,230 6.59
---------- ----------- ---------- -----------
Mortgage-backed securities
held to maturity 1,362,790 48,427 7.11 1,486,927 51,126 6.88
---------- ----------- ---------- -----------
Loans:
Residential real estate 2,696,921 104,438 7.74 2,364,417 88,175 7.46
Commercial real estate 988,425 43,709 8.84 1,019,208 42,684 8.38
Commercial business 191,235 9,185 9.61 186,213 7,396 7.94
Consumer 1,349,384 79,926 11.85 1,096,691 52,272 9.53
---------- ----------- ---------- -----------
Total loans(3) 5,225,965 237,258 9.08 4,666,529 190,527 8.17
---------- ----------- ---------- -----------
Investments:
Interest-bearing deposits
with banks 10,761 325 6.04 28,621 528 3.69
Federal funds sold 10,408 310 5.96 140,915 2,471 3.51
U.S. Government and other
marketable securities
held to maturity 3,553 101 5.69 3,737 187 10.01
FHLB stock 70,251 2,536 7.22 85,664 2,645 6.18
---------- ----------- ---------- -----------
Total investments 94,973 3,272 6.89 258,937 5,831 4.50
---------- ----------- ---------- -----------
Total interest-
earning assets 6,971,112 300,432 8.62 7,019,351 265,582 7.57
----------- ----- ----------- -----
Other assets(4) 453,218 499,048
---------- ----------
Total assets $7,424,330 $7,518,399
---------- ----------
---------- ----------
Liabilities and Stockholders' Equity:
Noninterest-bearing deposits $ 474,979 $ 426,900
---------- ----------
Interest-bearing deposits:
Checking 541,458 3,622 1.34 579,433 4,041 1.39
Passbook and statement 878,373 9,621 2.19 995,475 9,525 1.91
Money market 680,525 11,889 3.49 719,965 9,100 2.53
Certificates 2,699,869 72,254 5.35 2,818,886 69,588 4.94
---------- ----------- ---------- -----------
Total interest-
bearing deposits 4,800,225 97,386 4.06 5,113,759 92,254 3.61
---------- ----------- ---------- -----------
Borrowings:
Securities sold under
repurchase agreements 518,412 15,956 6.16 383,836 10,459 5.45
FHLB advances 918,982 27,561 6.00 943,509 26,189 5.55
Subordinated debt 50,378 2,702 10.73 50,676 2,735 10.79
Collateralized
obligations 41,729 1,479 7.09 43,001 1,126 5.24
Other borrowings 12,686 408 6.43 8,949 181 4.05
---------- ----------- ---------- -----------
Total borrowings 1,542,187 48,106 6.24 1,429,971 40,690 5.69
---------- ----------- ---------- -----------
Total interest-
bearing
liabilities(5) 6,342,412 145,492 4.59 6,543,730 132,944 4.06
----------- ------ ----------- -----
Other liabilities(4) 128,679 111,127
---------- ----------
Total liabilities 6,946,070 7,081,757
---------- ----------
Stockholders' equity:(4)
Preferred equity 25,019 25,019
Common equity 453,241 411,623
---------- ----------
478,260 436,642
---------- ----------
Total liabilities
and stockholders'
equity $7,424,330 $7,518,399
---------- ----------
---------- ----------
Net interest income $154,940 $132,638
----------- ----------
----------- ----------
Net interest rate spread 4.03% 3.51%
----- -----
----- -----
Net interest margin 4.45% 3.78%
----- -----
----- -----
<FN>
------------------------
(1) Tax-exempt income was not significant and thus has not been presented
on a tax equivalent basis. Tax-exempt income of $224,000 and $196,000
was recognized during the six months ended June 30, 1995 and 1994,
respectively.
(2) Annualized.
(3) Average balance of loans includes non-accrual loans and is presented net
of unearned income.
(4) Average balance is based upon month-end balances.
(5) Includes $647,000 and $4.1 million of interest expense on interest-rate
exchange agreements for the six months ended June 30, 1995 and 1994, respectively.
31
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time TCF is a party to legal proceedings arising out of its
general lending and operating activities. TCF is and expects to become
engaged in a number of foreclosure proceedings and other collection actions
as part of its loan collection activities. From time to time, borrowers have
also brought actions against TCF, in some cases claiming substantial amounts
in damages. TCF is also from time to time involved in litigation relating to
its consumer credit and mortgage banking operations and related consumer
financial services, including class action litigation. Management, after
review with its legal counsel, believes that the ultimate disposition of its
litigation will not have a material effect on TCF's financial condition.
On November 2, 1993, TCF filed a complaint in the United States Court of
Federal Claims seeking monetary damages from the United States for breach of
contract, taking of property without just compensation and deprivation of
property without due process. TCF's claim is based on the government's breach
of contract in connection with TCF's acquisitions of certain savings
institutions prior to the enactment of FIRREA in 1989, which allowed TCF to
treat the "supervisory goodwill" created by the acquisitions as an asset that
could be counted toward regulatory capital, and provided for other favorable
regulatory accounting treatment. TCF's suit is currently stayed pending a
decision by the United States Circuit Court of Appeals for the Federal
Circuit in another case addressing the government's liability for breach of
supervisory goodwill contracts. In August 1995, Great Lakes filed with the
United States Court of Federal Claims a complaint similar to the complaint
filed by TCF relating to supervisory goodwill acquired in connection with
several acquisitions made by Great Lakes. There can be no assurance that the
government will be determined to be liable in connection with the loss of
supervisory goodwill or, even if a determination favorable to TCF or Great
Lakes is made on the issue of the government's liability, that a measure of
damages will be employed that will permit any recovery on TCF's or Great
Lakes' claim.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 19, 1995, the Annual Meeting of the shareholders of TCF was held to
obtain the approval of shareholders of record as of March 1, 1995 in
connection with the five matters indicated below. Following is a brief
description of each matter voted on at the meeting, and the number of votes
cast for, against or withheld, as well as the number of abstentions and
broker nonvotes, as to each such matter:
Vote
-------------------------------------------------
Against or Broker
Matter For Withheld Abstain Nonvote
------ ---------- --------- -------- ----------
1. Election of Directors:
Joseph P. Clifford 15,215,647 720,436 N/A N/A
Robert E. Evans 15,215,816 720,267 N/A N/A
Luella G. Goldberg 15,475,407 460,676 N/A N/A
Mark K. Rosenfeld 15,426,045 510,038 N/A N/A
Ralph Strangis 15,468,634 467,449 N/A N/A
2. Ratification of KPMG Peat
Marwick LLP as independent
public accountants for 1995. 15,777,189 108,844 50,050 0
3. Increase the maximum permissible
size of the Board of Directors
from 15 to 25 members. 14,029,242 1,791,687 115,154 0
4. Approval of the TCF Financial
1995 Incentive Stock Program. 11,022,922 2,890,326 187,169 1,835,666
5. Approval of the Directors Deferred
Compensation Plan and Trust
Agreement. 13,191,627 690,303 218,487 1,835,666
ITEM 5. OTHER INFORMATION.
As previously disclosed, the Securities and Exchange Commission ("SEC") has
conducted an investigation, in which the Company fully cooperated, concerning
the appropriateness of the timing of loan and real estate provisions taken by
TCF in the second quarter of 1990. In 1994, TCF instituted discussions with
the SEC Staff to ascertain whether the proceedings could be settled on a
mutually acceptable basis. For purposes of settling this matter and without
admitting or denying the SEC allegations, the Company has agreed to the entry
of an administrative cease-and-desist order with respect to the financial
reporting provisions of Sections 13(a) and 13(b)(2)(A) of the Securities
Exchange Act of 1934 and Rules 12b-20, 13a-1 and 13a-13 promulgated
thereunder. The order states that losses or reserves recognized or taken on
certain real estate assets in the second quarter of 1990 should have been
recognized or taken during the preceding three quarters. The order does not
concern any matters occurring later than the second quarter of 1990 and does
not require any restatement of prior period financial statements by TCF. In
August 1995, TCF was advised by the SEC Staff that the order was approved.
TCF is of the view that the resolution of the matter on this basis does not
have a material effect on TCF's overall financial condition, operations or
profitability.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Index to Exhibits on page 35 of this report.
(b) Reports on Form 8-K.
None.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCF FINANCIAL CORPORATION
/s/ Lynn A. Nagorske
--------------------------------------
Lynn A. Nagorske, President, Chief
Operating Officer and Treasurer
(Principal Financial Officer)
/s/ Mark R. Lund
--------------------------------------
Mark R. Lund, Senior Vice President,
Assistant Treasurer and Controller
(Principal Accounting Officer)
Dated: August 11, 1995
34
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
FOR FORM 10-Q
Exhibit Sequentially
Number Description Numbered Page
------- ----------- -------------
4(a) Copies of instruments with respect N/A
to long-term debt will be furnished
to the Securities and Exchange Commission
upon request.
11 Computation of Earnings Per Common 36
Share
27 Financial Data Schedule 37
35